Companies leaving Russia are facing huge losses

Businesses including BP plc, Shell plc and Apple Inc. have begun severing ties with Russia as it continues its attacks on Ukraine. On Sunday, BP said it plans to pull out of its nearly 20% stake in oil giant Rosneft Oil Co, after Shell said a day later that it would withdraw from its joint venture with Gazprom PJSC and Nord Stream will end its financing of 2 Natural. gas pipeline project.

Commodity firm Glencore plc said it is reviewing its business in Russia, which includes EN+ Group plc and a stake in Rosneft. Companies outside the oil and gas industry, such as Apple and Dell Technologies Inc. Said that they would withdraw from Russia by stopping sales of the product.

But doing so comes at a cost. According to accountants and valuation consultants, splitting up Russian investments and joint ventures can dent companies’ income statements because of their low value. Under US and international reporting standards, companies are required to incur an impairment charge, or write-down, when the sum of the estimated future cash flows from an asset is less than its book value.

Such losses cover tangible assets, such as factories and land, and intangible assets, such as brands and goodwill, that are created when one company buys another at a price higher than the fair market value of its assets.

In Russia, assets of foreign companies can range from joint ventures to equipment, oil fields and refineries. A write-down usually means that an asset has lost some of its value, while a write-off denotes a complete loss of value.

Losses from these divestitures, some of them multibillion-dollar holdings, would constitute some of the biggest write-downs of the year, said David Trainor, chief executive of New Constructs LLC, an investment-research firm.

“They are seeing significant losses,” he said.

For example, BP plans to charge significant non-cash fees to reflect forex losses it has accumulated since 2013 – the year it acquired a 20% Rosneft stake – and pay a financial return rather than an equity interest. Books a revaluation of its stake as assets, a spokesperson said. Under International Financial Reporting Standards, BP can no longer use equity accounting for its stake because it does not meet the criteria for having a “significant influence” on Rosneft; Two BP directors resigned from Rosneft’s board on Sunday.

BP will assess the fair value of the stake at the end of the first quarter and write off the difference between that amount and the roughly $14 billion value on its books by December 31, 2021.

“Depending on what the fair value is, that would be part of the $14 billion that’s written off,” the spokesperson said. The company plans to report the charge in May as part of its first-quarter earnings.

Shell said its move to exit its Russian joint ventures is expected to reduce the book value of its Russian assets and lead to losses. The company said $3 billion in non-current assets was held in these joint ventures at the end of 2021. A spokesman said Shell plans to conduct a thorough loss analysis. It is also considering all available avenues of exit, such as equity sale or transfer.

The companies did not elaborate on how they plan to go about the disinvestment. For example, it’s unclear how they would negotiate a sale with a buyer, or they would just leave the property if they failed to find one. Restrictions imposed by the US and Europe will also limit the range of potential buyers. In some cases, companies may be allowed to sell to no one but a joint venture partner, potentially reducing the value of the stake.

Shishir Khaitan, managing director of the valuation advisory group at investment bank Stout Risius Ross LLC, said it would be difficult to determine the current value of assets given the economic pull of sanctions and geopolitical uncertainty.

If the crisis and restrictions continue in the coming weeks, companies could decide to write off their once-valued assets at zero – meaning they have no value, Mr Khaitan said. “Companies can easily walk away and that would be a complete loss,” he said.

The exact size of the losses will become clear in the coming quarters as companies disclose them in financial statements. To reach those figures would require more perseverance than usual, said Philip Keeje Hong, associate professor of accounting at Central Michigan University.

“It is always difficult to measure market cap at any given time, and the political climate doesn’t really help,” Mr. Hong said.

Vanderbilt University accounting professor Paul Chaney said some companies try to defer testing for impairment as they account for them as part of discontinued operations rather than continuing operations. This allows them to avoid reporting less income from continuing operations, he said.

“They can see what would be the best reporting strategy for us so that we look as good as we can,” Chani said.

Last year, companies reported small asset losses as the economy was bouncing back from the Covid-19 pandemic. Data provider Calcbench Inc. found that businesses in the S&P 500 reported $12.59 billion in asset losses for the past year, down from $109.21 billion in 2020. The jump in 2020 was driven largely by booking fees by oil and gas businesses as energy prices fell and pressure mounted to reduce carbon emissions.

Calcbench said Wednesday that nearly 94% of S&P 500 companies had reported full-year earnings for 2021.